Introduction

Is there more or less poverty in countries that have higher income inequality? Consider the following hypothetical example.

Country A: The poorest income group earns an average of $4,000 per year. The richest income group earns an average of $10,000 per year. Incomes are relatively equal.

Country B: The poorest income group earns an average of $10,000 per year. The richest income group earns an average of $10,000,000 per year. There is a high degree of income inequality.

Assuming prices of goods and services are the same in both countries, which country do you prefer to live in?

If comparisons bother you and you mostly want people to have relatively equal incomes, you will answer country A.

If you care about absolute living conditions and purchasing power, you will answer country B. The standard of living is higher in country B, and the opportunities for advancement are greater.

People in countries with high degrees of income inequality typically do not stay poor. One of the links in this unit points to an article that explains that nearly 60% of people who are poor in the United States, are no longer poor ten years later.

A substantial percentage of the people in the group that remains poor (the ones remaining poor after 10 years) are in welfare programs. This brings into question the effectiveness of welfare programs. They may help some people in the short run, but what do they do for them in the long run? The welfare reforms of 1996, which introduced stricter eligibility requirements, have been a step in the right direction. Should we go further, and perhaps take welfare programs out of the hands of governments and leave caring for the needy up to local organizations, churches, private charities, neighbors, and friends? Should donations to help the poor be an individual choice, as Ayn Rand recommended? Or should donations be mandatory (taxes) and be in the hands of government administrators? This unit discusses these and other questions related to income inequality and poverty.